Olin Corp (OLN) 2003 Q3 法說會逐字稿

Good day and welcome to the Olin Corporation third-quarter 2003 earnings conference call. This call is being recorded.

With us today from the Company is the President and Chief Executive Officer, Mr. Joseph Rupp, Executive Vice President and Chief Financial Officer, Mr. Anthony Ruggiero, and the Vice President of Investor Relations and Public Affairs, Mr. Richard Koch.

At this time, I'd like to turn the call over to Mr. Joseph Rupp.

Thanks for joining us today. Also with us this morning in addition to Tony Ruggiero and Dick Koch is John McIntosh, President of our Chlor Alkali Products division.

Olin Corporation last night announced net income in the third quarter of 2003 of $6 million, or 10 cents per diluted share. This compared with a net loss of $1 million, or 2 cents per diluted share, in the third quarter of 2002.

Sales for the third quarter of 2003 were $414.5 million, which included sales of $54.5 million for Chase Industries, which was acquired in September of 2002. Excluding Chase, sales for the third quarter of 2003 were $360 million, and that compared with $340.3 million last year.

Our third-quarter results were in line with our previous expectations of earnings being in the 10 cent per share range. Our third-quarter operating results were more favorable than they were a year ago, primarily because of the turnaround in the chlor alkali market, which resulted in significantly higher ECU prices.

Winchester sales in the third quarter exceeded 2002 as a result of higher domestic military demand, and earnings in our Metals segment were below last year, primarily because of lower industry-wide demand for brass products.

Let's turn to Olin's third-quarter results, starting with Chlor Alkali. Chlor Alkali product sales for the third quarter of 2003 were $100.9 million, an increase of 21 percent from the third quarter of 2002. Chlor Alkali posted operating income of $13.2 million, compared with an operating loss of $8.1 million in the third quarter of 2002.

The improved operating results were primarily due to higher ECU selling prices. Sales volumes were somewhat lower. Our ECU netback, excluding our Sunbelt Plan, was approximately $335 in the third quarter of 2003, compared with approximately $240 in the third quarter of 2002. We are expecting ECU prices to decrease from the third quarter of 2003 to the fourth quarter of 2003, as our contracts reflect the impact of third-quarter market-price declines.

Taking a long-term view of the Chlor Alkali business, 2003 has been a dramatic turnaround for us due to higher ECU prices and continued initiatives to reduce costs.

Natural gas prices, which are a significant costs factor for other chlor alkali producers, are not projected to be a significant cost issue for us because we buy our electricity from utilities that derive their power primarily from coal, nuclear and hydroelectric sources.

CMAI continues to forecast further improvement in ECU prices in 2004 based on expected growth in the economy and the Chlor Alkali capacity rationalization that has taken place.

Let's turn to Metals. Sales for the third quarter of 2003 were $216.3 million and include sales of 54.5 million from Chase Industries, which we acquired in September of 2002.

Excluding Chase, third-quarter 2003 sales were $161.8 million. Sales in the third quarter of 2002 were $164 million. Shipment volumes, excluding Chase, were down 10 percent from 2002, mainly due to softer demand in the automotive and coinage segments with other market segments being flat to slightly weaker, except for the ammunition segment, which continues to be strong.

Despite the 10 percent volume decline, reported sales were only off 1 percent because of higher copper prices and a product mix that contains a higher metal component. The Metals segment operating loss of $5.1 million includes $1.6 million of Chase profits in 2003. In the third quarter of 2003, the Metals segment, excluding Chase, recorded an operating loss of $6.7 million in comparison to a profit of 4.8 million in 2002. The Metals segment, again excluding Chase, had lower opening results in the third quarter of 2003, primarily because of softer volumes, margin pressures, higher wage and fringe benefit costs, which in particular in the area of pension and medical benefits. In addition, higher natural gas costs also negatively affected operating results.

Chase sales and profits for the third quarter of 2003 were lower than the comparable period last year as a result of softer demand and lower selling prices.

Let me give you a few statistics to allow you to compare third quarter 2003 and 2002. Shipments to the automotive segment decreased in 2003 by 12 percent, as automotive production has softened from the third quarter of 2002. (indiscernible) shipment were down 41 percent from last year, resulting from reduced demand from the United States Mint, primarily related to the decreased demand for the state quarter program and the continued general softness in the overall economy. Shipments to the ammunition segment in 2003 increased from 2002 by 36 percent, due to continued strong demand from the military.

Moving to Winchester, sales for the third quarter of 2003 were $97.3 million, compared with 93 million in the third quarter of 2002. The increase in sales is primarily driven by higher domestic military demand.

Operating income in the third quarter of 2003 was $7.2 million, compared with 7.8 million in 2002, primarily because the favorable effect of higher sales was more than offset by higher wages, fringe benefits and other costs.

Now, let me turn the microphone over to Tony Ruggiero, who will review several financial items with you. Tony?

Thank you, Joe. Now, let's turn to the income statement, as I compare the third quarters of 2003 and 2002. Our gross margin as a percent of sales, which is defined as sales minus cost of goods sold of itemized sales, increased from 9.5 percent in 2002 to 11.7 percent in 2003, primarily due to higher selling prices in Chlor Alkali.

We continue to forecast that Chlor Alkali will be the largest factor contributing to our earnings in 2003 and 2004 because of higher Chlor Alkali prices.

Selling and administrative expenses in 2003 were 7.8 million higher than in 2002, primarily due to the inclusion of Chase's selling and administrative expenses, which were not in last year's numbers, higher pension expense and other administrative expenses such as consulting, legal expenses and various insurance costs.

The earnings of nonconsolidated affiliates were 1.8 million for the third quarter of 2003, compared to a loss of .5 million in 2002, primarily because of higher ECU pricing at Sunbelt.

Interest expense for the third quarter of 2003 decreased from 2002 because of lower interest rates on the Company's debt portfolio.

Our effective tax rate was 45 percent in the third quarter of 2003, consistent with our prior guidance. When we estimate our tax rate for the balance of the year, we will remain in the 45 percent range.

At the end of the third quarter, we had cash and cash equivalents of 148 million, compared with 119 million of cash and short-term investments in 2002. Receivables are higher in 2003 primarily because of higher sales in the Chlor Alkali and in Winchester.

Our inventories of 235 million in 2003 are $20 million lower than last year, due primarily to our efforts to reduce inventories in our Metals businesses, consistent with lower market demand.

Property, plant and equipment was 503 million at the end of the third quarter of 2003, compared with 551 million at the end of the third quarter of 2002. This decrease in the PP&E was largely attributable to the Indianapolis shutdown and the fact that depreciation exceeds capital spending in 2003.

Net debt, which we define as total debt less cash and cash equivalents, was 180 million in 2003 and 236 million in 2002.

The accrued pension liability is higher at the end of the third quarter of 2003 than 2002, primarily due to the minimum pension liability adjustment recorded in December of 2002. Our other liabilities are higher at the end of the third quarter of 2003, primarily due to the SFAS 143 charge recorded in the first quarter of 2003.

In the fourth quarter of 2003, Olin expects to report a loss in the 5 cent per diluted share range, compared with a reported loss of 21 cents per diluted share in the fourth quarter of 2002. But we should point out that the reported 2002 loss of 21 cents includes the 18 cent per-share charge recorded in connection with the surrender of life insurance policies purchased under the Company owned life insurance program, the COLI program.

Fourth-quarter 2003 results are expected to be below the third quarter of 2003, primarily because of the normal seasonal decline in Winchester, lower Chlor Alkali sales volumes and prices, and continuing soft demand in the Metals segment. Both Chlor Alkali and Metals are also affected by seasonal factors.

We continue to project that we will remain in compliance with our debt covenants. As you may know, both our consolidated leverage ratio and consolidated interest coverage covenants are 3.5 times at September 30, 2003 and remain at that level thereafter in our revolving credit agreement.

We continue to expect that our capital spending will be in the $55 million rate in 2003. Our depreciation and amortization in 2003 will be in the $85 million range. Depreciation and amortization will about $1.50 per share this year.

As you know, yesterday, the Board of Directors declared a quarterly dividend of 20 cents on each share of Olin Common stock. This is the 308th consecutive quarterly dividend to be paid by the Company.

Before I conclude, let me remind you that, throughout this presentation, we have made statements regarding our estimates of future performance. Clearly, these are forward-looking statements and results could differ materially from those projected. Some of the factors that could cause actual results to differ are described in the Outlook section of our most recent Form 10-K and as updated in our quarterly reports on Form 10-Q and in our third-quarter earnings release.

A copy of our prepared remarks today will be available on our Web site, www.Olin.com, in the Investor Section under recent press releases and speeches, together with the earnings press release and other financial data and information.

Operator, we are now ready to take questions.

Thank you, sir. Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Michael Judge (ph) with Greenwich Consultants.

How dies the brass business look in October, sequentially, versus September? Are you seeing the same type of pick-up that others have noticed?

Our visibility in our brass business is very limited; we have extremely short lead times. We have seen some targeted areas where we've seen some pick-up, but we do not have a sense of any sustainability yet at this point in time.

Thank you.

Robert Goldberg with New Vernon Associates.

Joe, just to follow-up on that, I didn't hear you mention what's going on in the electronics and the telecom end markets in the Metals business. Is that maybe where you are seeing, at least on the electronics side, the targeted improvement in October?

There has been a little bit of pick-up there, Bob, but again, nothing to be sustainable about. I failed to mention that, in the quarter, electronics was down 7 percent, so while we see some spurt activity, again, no sustainability there yet.

Does that mean you're going to need to take more actions on the cost side, you know, with the loss -- fairly significant quarterly loss in the Olin business. The Chase business is still profitable at least.

We are continuing to work on the cost side, Bob, as we've talked about. Our theme on our cost side is to offset the cost escalations that we find in businesses.

Okay. On the Chlor Alkali side, I understand your reluctance to talk about how much of a decline you're going to see in the fourth quarter, but could you talk a little bit about, again, the nature of your contracts and what we should expect, going into 2004? It seems like the caustic price increase for the fourth quarter has failed, and I understand that prices may decline as well in the fourth quarter as it did in the third quarter. Any thoughts on the ability to start turning prices around in 2004?

Bob, we just don't have the visibility right now to predict pricing at the first of first year. Obviously, our contract portfolio makes our first-quarter pricing dependent upon what pricing in the marketplace does in the fourth quarter. We have seen, in the third quarter, as well as in the early part of the fourth quarter, downward pressure on pricing, especially on caustic. So, we will just have to monitor pricing movements for the balance of this quarter before we can make any projections on the early part of next year.

CMAI does continue to forecast -- as well as others who follow the chlor alkali industry -- improved business conditions and improved pricing as we move into 2004.

Okay. Lastly, if I could, I noticed that during the month of October, Governor Davis in California signed a couple of bills, I guess on his way out of office, concerning perchlorate (ph). I was just curious if that would have any impact on your costs in the future years in terms of cleanup activity, and what, if anything, you have reserved for that liability -- potential liability.

We have somewhat raised our pool for environmental remediation in the third and fourth quarters, as we had told you on our second-quarter conference call, by (indiscernible) about $2 million a quarter. We are not specifically aware here as to what was signed. We are continuing to work with the authorities in that area to develop programs to deal with the potential issue. It's a very complex issue because the entire issue of whether perchlorate (ph), in point of fact, is damaging or not, is still an issue in the certain domains. But in any event, we have provided for somewhat of an increase in our environmental costs in the third quarter, and plan to do so in the fourth-quarter -- as I said, in the $2 million range.

Are you spending anywhere near that amount, though, in terms of cash out the door? Is there anything material being spent at this point?

No, the provision and the spending are reasonably close this year.

Eric Sirotta (ph) with Merrill Lynch.

My questions have been answered. Thank you.

Leslie Ravitz of Morgan Stanley.

Good morning, guys. I need some help in understanding the brass a little bit better. We shut down a large facility in the first quarter. We took a charge. Are those savings showing up yet?

The savings are showing up, Les. The issue for us is the further decline in volumes that have occurred industry-wide. Just for reference is that we're running about 80 percent of capacity utilization in all of our mills combined, and so we're getting the costs offset, but we don't have the revenue that we would get with the higher volumes.

Okay. When you said (indiscernible) decline in coinage, you mentioned the state of the economy as a factor. Obviously, the economy looks like it's pretty strong.

You are astute in that when this lags a little bit -- as the economy strengthens, the demand for coins lags that but it will pick up. But right now, you know, though, it hasn't picked up as of now.

So, how do you look at 2004 for your brass business? Indications are the economy is growing. Do you still see volume fall-off? Are you looking for some recovery in volume?

Our hang-up is that it continues to be the visibility issue. What our issue is that we really can't see very far out. For example, in the rod business, where half the business works on seven-day lead times, and what's happening in our strip business where normally, we would have eight week leadtimes, we've got to two and three week lead times, so we can't see out far enough to see if there's any traction starting to take place.

John, a question for you on Chlor Alkali -- you said that you expect to see lower caustic in the fourth quarter versus the third quarter. Could you give us an indication of where October was, since October's over?

Well, October contract pricing has dropped, depending upon whom you reference, between 10 and $20 in the marketplace. That's on top of the roughly $40 of contract price degradation in caustic that occurred in the third quarter.

So, the third quarter lost about $40 on contract caustic from where it ended up in June. Is that correct?

Yes, sir.

And so far in the fourth quarter, you've lost another 10 to 15?

Yes, sir.

Douglas Duffy (ph) with DC Capital.

Two questions -- could you help me a little bit on the brass capacity utilization? It looked like the inventories came down a fair bit. Then the volume shipments were down, so it would imply to me that the utilization was down pretty strongly versus a year ago. Maybe it was a plant shutdown or something had to do with you being at 80 percent, but I was a little surprised the number was that high. If you could comment on that.

Then related to that, just as you studied, I guess, other economic cycles and have been through, how does the brass business typically react as -- you know, at this stage of an economic recovery?

How brass normally reacts is it lags, and we've looked at, I guess, the past five recessions, and it's like everyone of them except one -- (indiscernible) lagged the economic pick up.

Was it a quarter or two quarters? Is there any way to quantify or give us some help with the degree of lag? Does this one look like the other ones? I know it's hard, but we're all speculating here, but I'd like your views on it.

I would say it's longer than one quarter for sure, and I think it's -- this recovery is a much slower recovery than anything we've seen, to be quite honest about it.

From a capacity utilization perspective, where we are is in the low 80 percent range on our strip products and the 70 percent range in our Chase business, which would be a rod product.

Was that representative for the third quarter as well?

Yes.

Okay. The last one -- just with your pension shortfall, could you comment? What's your real plan to sort of get that trued-up, either in terms of funding and then even within the plan, any decisions or modifications on asset allocations within the plan or in benefit modifications?

In looking at the pension plan, I think everyone knows that the markets have been up this year, and our overall planned performance to date is in the high teens.

In the high teens?

Yes, like, 15 to 20 percent. That, combined with a somewhat higher interest rate, influences, number one, the charge that you take at the end of the year, if any.

At the moment, we're looking at a very, very modest charge. That's why we don't really bother to mention it.

I've said before that, as we look ahead, we don't anticipate any significant pension contribution until 2006. As we update that and monitor that, even that is moving further out. We, like every other company in America, is looking at our pension plan to determine the best way to maximize returns and to minimize costs. We will continue to do that. I think (indiscernible), but it is an area we're looking at, along with everything else that we are looking at.

Any change in, I guess, pension modification? Is that is tied into kind of union issues and contractual obligations?

Well, you have union issues, and then you also have the fact that Olin is a company that has been in existence for a long time, and most of the people drawing from the pension plan are people who retired from the Company. So, when one makes a change to the pension plan formulas or whatever, it affects a very small proportion of the participants in the plan. So, it takes time for those changes to flow through to the financials of the Company. Again, that's not stopping us from intensely revealing that, as do others. But the performance of the markets this year has really helped the situation. You know, Congress is looking at several bills to help the contribution situation -- that we're not looking at anything until 2006.

Again, it's diminishing, but Congress must do something by the end of the year because the existing legislation expires, which determines the interest rate that you use the actuarial funding. It's believed that they will pass a measure that will allow for some flexibility in that regard, even though, in our case, if they were to -- (technical difficulty) -- the old formulas, we are still fine in the immediate term.

Michael Cristowdolo (ph) from Inwood (ph) Capital.

Good morning. Could you review your CapEx spending plans again for '03 and '04, please?

For '03, we'll spend in the $55 million range, and we are in the process of reviewing our capital for 2004 s we speak.

Would you imagine it being above your 85 level D&A level?

No, absolutely not.

You've spent 35 million nine months to date, so you are expecting it to be pretty back-end weighted for this year?

Yes. There are a few projects that are wrapping up as we speak.

What would you say the maintenance level of CapEx is?

We've consistently said that it's in the 40 to $50 million range.

With respect to the utilization levels that you mentioned, 80 percent in strip, 70 percent in Chase rod, what was the historical trough in previous cycles for those businesses?

I don't have those numbers at my fingertips at this point in time. What I would tell you is that this business drop-off, just industry-wide, has been deeper and longer than any other. In other words, we experienced just an industry-wide consumption rate of about a 35 percent drop-off is what has happened. Historically, that has not. Normally we've had probably a 15 to 20 percent drop-off.

Okay. The last question on Chlor Alkali for John McIntosh -- John, could you talk a bit about the, I guess, what Formosa took from capacity out recently along the Gulf? Could you just re-dimension for us the capacity that has been taken out of the system and how that portends for the ECU complex looking out for the next few years?

Formosa, recently within the third quarter, announced the shutdown of their Baton Rouge facility -- Baton Rouge, Chlor Alkali facility. The capacity of the facility was 270,000 ECUs per year. That brings the total capacity that has been shutdown in North America since the year 2000 to a number that is roughly 10 percent of the North American capacity. That is one of the fundamental drivers that is counted by all who follow the industry as one of the key components that will lead towards improved business results in the coming quarters as the supply demand balance -- because of this rationalization -- gets closer to a point in time at which pricing traction is possible in the industry.

Is there any new capacity coming on over the next year or so that you're aware of?

No, sir, not that we're aware of.

Jeff Peck with Janney Montgomery Scott.

Good morning. I don't know if you mentioned -- (technical difficulty) -- but I don't know if you mentioned it in Chlor Alkali. I was wondering if you could give us an idea of roughly the utilization rates now versus where you were this summer and maybe even earlier this year, just so we can get a feel for where the business is.

Our operating rates in the third quarter were in the mid 80 percent. That was down from the second quarter; operating rates in the second quarter were above 90 percent in our system. We expect the fourth-quarter operating rate to be similar to possibly marginally lower than we saw in the third quarter.

Okay, great. In the Metals business, I'm wondering (indiscernible) last time, but is there a geographic issue where we're seeing manufacturing move to Asia or China specifically and maybe they are sourcing some brass locally there, and that may be causing a kind of little worse than previous downturn kind of numbers for you here?

Your recollection is correct; we did talk about that time, that there was offshoring was the terminology that we had talked about. We had stated that there is roughly 5 percent that had moved offshore.

I just wanted to make sure about that. Finally, I mean, on the cash-flow statement, there was a jump -- not a jump, but there was a good source of cash from noncurrent liabilities. I mean, if you could tell us what that is?

Yes. That's an offset to the loss, which includes the FAS 43 charge that we recorded, which was a non-cash charge. When you have a non-cash charge in income, you have to then sort of fix the cash-flow -- (multiple speakers) -- fact that it's non-cash.

Robert (indiscernible) with Bear Stearns.

I just want to follow up a little bit on one question dealing with the brass business -- some picayune questions. One, is business, from when we spoke the last time, which was the end of the quarter or there abouts -- is it worse than you thought, better than you thought, or about as you thought when we spoke last? Is there any signs of life in any of the end-use markets, you know, that you guys track?

I would say that it's where we thought it was the last time we spoke. There has been some spurts of connectivity. As I said, Bob, the dilemma is that we don't have enough visibility to know if it is sustainable or not.

Let me ask you this -- right now, you're projecting a loss for the fourth quarter in brass. Do you see that as seasonal, structural? I'm just curious. I guess the issue that I've wrestled with on the brass side is -- and I'm sure you guys -- is are you losing business -- are your customers using business offshore? Is that just a modest thing and we are waiting for some kind of recovery that is broader-based? That's what I'm wrestling with, as I know you guys are.

We are wrestling with it. The question on the fourth quarter I think is a fair question in that we do have seasonal issues, and we've got issues with order activity that makes it even more difficult for us to try to figure out what is really occurring in the fourth quarter.

When you figure it out, can you guys call me first?

(LAUGHTER). Yes.

We will call all of you!

You don't have to do that -- just me!

(OPERATOR INSTRUCTIONS). John Roberts with Buckingham Research.

Good morning, guys. I think you said the leadtime is two weeks now in brass -- (technical difficulty) -- you said it's more normally eight. Has it been coming down, or has it just been steady at this level for some time?

It's been at that level for some time, John.

We would expect the leadtime probably to increase before we would see any volume flow-through in your P&L?

Right.

Okay, so we've got to look at that leadtime as maybe a leading indicator?

We should.

Is there a specific anniversarying period here for the end of the government's state quarter program? Was there a major campaign that dropped off in the last 12 months and we will at least move past that for the year-over-year cops?

No. What happens is, there are five states each year that come out. It's obviously a ten-year program and we are in, I think, we will begin the fifth year of it. It's just that what has happened is that some of the demand for them has dropped off. There was a lot of interest in it initially and the interest level is always in this state that is being sent out is there is an interest level (sic) but not as much on a national basis.

Is there anything like Texas or California or a big state that sort of comes up and causes that to be lumpy?

The biggest, the lumpiest state was Connecticut, if you can believe it! I don't know if it follows rationality, to be honest with you.

That wasn't all you guys buying quarters!

We were trying to get as many as we could.

I believe, in the brass business, scrap is something like two-thirds or 70 percent of the raw materials. The volume being off so much, is that impacting your cost of raw materials on the scrap side at all?

The cost of scrap has gone up, as well as the cost of primary metal has gone up. But again, Scott, as you know, since we passed through the metal cost, that there really isn't an impact on us. The issue ultimately becomes, or could become sometime way out in the future, is availability of material because material is moving offshore quite a bit.

I thought you only passed through make-up metal costs. You actually pass through scrap costs too?

The total metal component, whether we make -- whether we buy it out of scrap or buy it out of virgin metal -- the total metal component gets passed along.

A question for John McIntosh -- I believe, back 24 months ago or further, as the ECU was coming down, the duration of your contracts were going up and that as the ECU was recovering, I thought the duration of the portfolio would be coming down in terms of how far out you are contracted in business and how your pricing would lag. You had a lot of lag as we sort of turned the corner from decline to increase earlier this year. Is the duration of the contract right now stable, or is it extending out or coming in again?

The duration is pretty stable, John. What has changed is some of the contract that we renegotiated in 2001, when we were definitely in a buyer's market instead of a seller's market, have, embedded in them, you know, annual cap, or annual ceilings for pricing that we are working our way out of and getting some of those contracts negotiated to during that time period to be more -- look more like current industry pricing looks.

Maybe a better question -- I don't know if you can tell us sort of the percent of the portfolio that's been refreshed versus the percent that's stale and you have to refresh?

I don't have that information. The metric we look at is how much of our business moves quarterly versus longer than quarterly. That is a better barometer to us. You know, the majority of our chlorine business and an even higher percentage of our caustic business -- those prices move quarterly, and that is obviously better than prices that have six-month lags or even one year firm commitment.

Okay. Then lastly, I think March had a reasonably good pool chemical season here. We are now seasonally off that and so forth, but it doesn't seem like you saw an impact of that in your business.

Their business typically -- they typically have outages in their business that are stressed between the third and fourth quarter of the year, so we see some change in both of those quarters, but I wouldn't speak (inaudible) the relative year-on-year comparison of their volume.

So it was all in the second quarter? It didn't carry at all into sort of the July period?

I would just rather not comment on their business.

At this time, Mr. Rupp, there are to further questions. I would like to turn the call back over to you for additional or closing remarks.

Thank you very much for joining us today and we will look forward to talking to you at the end of the fourth quarter. Good-bye.

That does conclude today's conference. We do appreciate your participation. You may now disconnect.